Cahya Mata Sarawak Bhd
(Aug 7, RM2.73)
Downgrade to hold (previously buy) with a lower target price (TP) of RM3.10 (previously RM3.80): We have cut our financial year 2019 (FY19), FY20 and FY21 earnings forecasts (F) by 20%, 22% and 14% respectively largely to factor in lower contributions from associate OM Materials (Sarawak) Sdn Bhd (OM Sarawak). The weaker associate profit arising from depressed manganese and ferrosilicon prices more than offsets improved contributions from Cahya Mata Sarawak Bhd’s (CMS) cement and construction materials business. As a result, we expect CMS’ FY19F earnings to contract 12%. We downgrade our call to “hold” with a lower sum-of-parts (SoP)-based TP of RM3.10.

 
Earnings are below consensus estimates largely due to lower OM Sarawak contributions. We expect OM Sarawak contributions to remain weak in the upcoming second quarter of FY19 results.

While we have factored in improved cement and construction-related contributions, there could be an upside to additional infrastructure spending in the run-up to the 2021 Sarawak state election, such as an increase in demand for building materials and ad hoc jobs. Potential new projects include the Coastal Road and Second Trunk Road packages.

As we have cut our earnings forecasts and rolled forward our valuations to FY20, our SoP-based TP dropped to RM3.10. This values the cement business at 13 times earnings (98 sen a share) and the construction, road maintenance and materials segments at 12 times earnings (RM1.31 a share).

Delay in Pan Borneo Highway construction projects will adversely impact demand for building materials. Our earnings forecasts have already imputed contributions from the state road concession as we believe the group will secure an extension. — AllianceDBS Research, Aug 6